Indian Reform

7/27/2019 Indian Reform

http://slidepdf.com/reader/full/indian-reform 1/34

A Decade of Economic Reforms in

India: the Unfinished Agenda

Nirupam Bajpai

CID Working Paper No. 89

April 2002

. Copyright 2002 Nirupam Bajpai and the President and Fellows

of Harvard College

at Harvard UniversityCenter for International DevelopmentWorking Papers



A Decade of Economic Reforms in India: the Unfinished Agenda

Nirupam Bajpai1

Crisis and Response:

In response to a fiscal and balance of payments crisis in1991, India launched a program of economic policy reforms. The program consisting of stabilization-cum-structural adjustment measures was put in place with a view to attain macroeconomicstability and higher rates of economic growth. Some rethinking on economic policyhad begun in the early 1980s, by when the limitations of the earlier strategy based uponimport substitution, public sector dominance and extensive government control over private sector activity had become evident, but the policy response was limited only toliberalizing particular aspects of the control system. By contrast, the reforms in the1990s in the industrial, trade, and financial sectors, among others, were much wider and

deeper. As a consequence, they have contributed more meaningfully in attaininghigher rates of growth. India has gone through the first decade of her reform process.Hence, an assessment of what has been achieved so far and what remains on the reformagenda is in order 2. Four different governments were in office during the 1990s - theCongress government which initiated the reforms in 1991, the United Front coalition(1996-98) which continued the process, the BJP led coalition which took office inMarch 1998 and then again the BJP led National Democratic Alliance (NDA) inOctober 1999 till date. In short, it seems that India’s political system is more than ever in consensus about the basic direction of reforms.

As in the case of most developing countries that have liberalized the economy inthe last three decades of the 20th century, India’s reforms too were preceded by aserious financial crisis. In 1990-91, the gross fiscal deficit of the government (center and states) reached 10 percent of GDP, and the annual rate of inflation peaked at nearly17 percent in August 1991. Fiscal imbalances in India, which assumed serious proportions since the mid 1980s, had two important facets. First, the outpacing of therate of growth of revenues by the expenditure growth considerably reduced theresources available for public investment in the economy. The increasing use of borrowed funds to meet current expenditures rendered the latter self-propelling.Second, the increasing diversion of household savings to meet public consumptionrequirements not only resulted in the expansion of public debt to unsustainable levels, but also reduced the resources available for private investment.

An unprecedented balance of payments crisis emerged in early 1991. Thecurrent account deficit doubled from an annual average of $2.3 billion or 1.3 percent of GDP during the first half of the 1980s, to an annual average of $5.5 billion or 2.2

1 This paper draws on some of the research work that Professor Jeffrey Sachs and I have undertaken onIndia’s reforms over the past few years.2 For previous assessments of India’s reforms, see Joshi and Little (1996); Alhuwalia and Little (1998);and Sachs, Varshney and Bajpai (1999).



2

percent of GDP during the second half of the 1980s. For the first time in modernhistory, India was faced with the prospect of defaulting on external commitments sincethe foreign currency reserves had fallen to a mere $1 billion by mid-1991.

The balance of payments came under severe strain from one liquidity crisis

experienced in mid-January 1991 and another in late June 1991. On both occasions, theforeign exchange reserves dropped significantly and the government had to resort toemergency measures, such as using its stocks of gold to obtain foreign exchange,utilization of special facilities of the IMF, and emergency bilateral assistance fromJapan and Germany among others. Having resorted to these measures, the governmentwas able to avoid default in terms of meeting its immediate debt service obligations andthe financing of imports. Subsequently, the government embarked upon a program of more fundamental economic policy reforms.

I. Fiscal Consolidation:

The fiscal deficit of the central government, which stood at 8.3 percent of GDPin fiscal 1990/91, was brought down to 5.9 percent by the end of 1991/92. However,there was a major slippage in 1993-94 when the fiscal deficit bounced back to 7.5 percent of GDP3. Since then, the fiscal deficit has witnessed a gradual decline and was placed at 5.5 percent of GDP in 2000/01 and is budgeted at 5.1 percent for 2001/02(Table 1). A major part of the fiscal deficit, namely, the revenue deficit (revenueexpenditure minus revenue receipts) currently running around 3.4 percent of GDPremains the core problem area. Over the 1990s, the revenue expenditure has in factrisen from an already high level of 12.9 percent of GDP in 1990/91 to 13.3 percent in2000/014. On the contrary, capital expenditure has gone down substantially from analready low level of 5.6 percent of GDP in 1990/91 to a mere 2.3 percent in2000/01.Central government total expenditure has gone down from being 18.5 percentof GDP in 1990/91 to 15.6 percent in 2000/01. This reduction, however, hasmaterialized primarily at the cost of cuts in capital expenditures.

Considering the excessive pre-emption of the community's savings by thegovernment, the potential for crowding out the requirements of the enterprise sector,the pressure on interest rates, and rising interest payments on government debt, it isessential to reduce the fiscal deficit still further, and more aggressively, mainly bylowering the revenue deficit. In the absence of substantial fiscal adjustment, neither willthe government be able to maintain low inflation, nor will India achieve a path of sustainable high growth. India’s overall government spending, (center and states)current around 33 percent of GDP, needs to be brought down substantially as a proportion of national product in order for India to achieve its reform goals of macroeconomic stability and long-term rapid growth (Bajpai and Sachs, 1997a).

3 These ratios to GDP are at 1980/81 prices. With a change in the base year, all ratios in the tables in this paper are at 1993/94 prices.4 CMIE Economic Intelligence Service, Public Finance, March 2002.



3

Keeping in view the fact that the fiscal deficit still remains very high, the process of fiscal consolidation needs to be pursued much more vigorously. Accordingto the Global Competitiveness Report5 (GCR) 2001/02, India ranks 72nd out of the 75countries ranked on general government fiscal surplus/deficit as a percentage of GDP inthe year 2000. Large and persistent fiscal deficits in India are a serious cause for

concern. There are several risks with high fiscal deficits. First, budget deficits couldonce again spill over into macroeconomic instability. Second, the budget deficitsimperil national saving rates, thereby reducing overall aggregate investment, and jeopardizing the sustainability of high growth. The effects of low investment rates onoverall GDP growth are not hard to see. Most directly, low levels of public investmenthave rendered India’s physical infrastructure incompatible with large increases innational product. Without an increase in the scale and rate of growth of infrastructureinvestment, growth rates in India are bound to remain moderate at best. Third, thecontinuing large budget deficits, even if they do not spill over into macroeconomicinstability in the short run, will require higher taxes in the long term, to cover the heavy burden of internal debt. High tax rates will place India at a significant disadvantage

relative to other fast-growing countries.

Expenditure reform in India is critical in view of the fact that India’sgovernment dissaving (refer to Table 5 for data on public savings) and overall level of government spending remains very high. There is probably little room to cut capitalexpenditures, in view of the fact that they have already been squeezed significantly. Of course, in the future, it should be the private sector rather than the government to meetmost of the enormous infrastructure needs of a growing economy. Still it is hard toimagine that rapid growth can be accomplished with public investment spending bygovernment of less than the current rate relative to GDP. According to the GCR 2001/02, India ranked 66th out of the 75 countries ranked on the overall quality of infrastructure.

Inadequate public investment in the post-reform period had an adverse impacton the economy (Table 5). It led to serious under-investment in critical infrastructuresectors such as electric power generation, roads, railways and ports. For example, theaddition to power generation capacity in the public sector during the Eight Plan wasonly a little over half the target. There were similar shortfalls in capacity creation inroads and ports. These shortfalls would not have mattered if capacity in the privatesector had expanded, but this did not happen either. The end result was that totalinvestment in infrastructure development was less than it should have been, leading tolarge infrastructure gaps. The economy was able to achieve higher economic growth inthe post reform years despite inadequate investment in infrastructure because there wassome slack in the system, but there can be no doubt that rapid growth will be difficult tosustain in future unless investment in infrastructure can be greatly expanded.

5 The Global Competitiveness Report 2001/02, World Economic Forum and the Center For InternationalDevelopment at Harvard University, Oxford University Press, February 2002. For GCR details and other comparative rankings for India refer to Section VI.



4

Expenditure Reform:

Governmental action is needed in reducing expenditure under four major headsof current spending. With respect to internal public debt, there is one importantmechanism that could substantially ameliorate the fiscal situation. Privatization of

public enterprises could raise significant funds as a percent of GDP, which could beused to buy down the public debt. Not only would the stock of debt itself be reduced, but also the interest costs of servicing the debt would surely decline as the debt stock itself was brought under control. Interest payments account for as high as 4.9 percent of GDP in 2001/02 (Table 3). The cash value of these enterprises vastly exceeds the present value of profit flows that the state now collects on these assets. Public sector profits are dissipated in poor productivity, over manning, excessive public sector salaries, soft budget constraints, and generally poor public-sector management.

For this reason, sales of the enterprises to private sector buyers, if used to buydown the public debt, would yield annual saving in interest costs that far exceed the

government revenues that are claimed by virtue of state ownership of the assets. Thecentral government currently has equity holdings in 240 enterprises, 27 banks, and twolarge insurance companies. This is especially true in view of the fact that manyenterprises with significant positive market value are actually loss makers in currentcash flow, under state management. While the recent sale of 25 percent equity of VSNLand 33.6 percent of IBP, besides four hotels of the ITDC are very encouraging, the totalaccrual to the centr al exchequer from disinvestments in 2001/02 would only be aroundRupees 50 billion6, roughly about 41 percent of what the 2001/02 budget had estimatedto collect. Further spending cuts could come from liquidation of loss-makingenterprises that have no positive net market value. Liquidation of these would imply arise in domestic savings. Of course, saving would be higher if there is salvage value in part or all of some of these enterprises. To capture these savings would requireimplementation of an exit policy to allow the government to close down these loss-making enterprises.

Reduction in central government subsidies is another area of expenditurecontrol. Reforms in the current subsidy regime should be undertaken with the objectiveof reducing the overall scale of subsidies. Moreover, the reforms should help make thesubsidies transparent, and use them for well-defined economic objectives. Subsidiesshould focus on final goods and services with a view to maximizing their impact on thetarget population at the minimum cost. The key to subsidy reduction lies in phasedincrease in user charges in sectors, such as power, transport, irrigation, agriculture andeducation.

Reducing the size of the public administration could also cut governmentspending significantly, both at the federal and state levels. One way to achieve areasonable degree of success in this direction might be a freeze on new employment,matched by normal attrition through retirement and death. Existing functions couldeasily be met through modest improvements in computerization and information

6 Economic Survey, 2001/02, Government of India, Ministry of Finance, p.169.



5

systems. Obviously, bolder -- if less politically palatable -- solutions could result ineven larger savings. While the 2002/03 union budget does announce abolition of nearly12,200 posts out of the 42,200 identified by the Expenditure Reforms Commission assurplus manpower 7, one would have to wait and see if indeed this is implemented. Weestimate expenditure saving that could be achieved by these cuts to a total of roughly

4.9 percent of GDP over a three-year period for the federal government

8

(Sachs andBajpai, 2000). Of course, we would stress that these are approximate. Perhaps these bold cuts could be augmented by 1 or 2 percent of GDP in increased tax collections,though credibility in collecting more taxes would depend firmly on making sharp cutsin major areas of waste.

Tax Reforms:

While progress has been made in the area of tax reforms, the tax structure inIndia still remains very complicated with high rates of taxation with regard to bothdirect and indirect taxes. In the area of personal income tax, the reforms have

succeeded in establishing a regime of moderate tax rates, which compare well withother countries. The maximum rate of personal income tax has come down from 56 percent at the start of the reform to 30 percent. The rate of corporation tax on Indiancompanies, which varied from 51.75 percent to 57.5 percent in 1991-92, dependingupon the nature of the company, has been unified and reduced to 35 percent. However,corporate tax r ates are still quite high in India despite the reduction announced in theunion budget9 for foreign companies. Per the GCR 2001/02, India ranked 50th out of atotal of 75 countries ranked in the GCR on corporate income tax rate in 2001. Despitethese reductions in rates, revenues from personal and corporate taxes have remained buoyant as indicated by the continuing increase in these revenues as a percent of GDP(Tables 3 & 4). The share of direct taxes in GDP is still too low, but it has increasedsteadily over time. On the whole, this appears to be an area where the strategy of reform seems to be working fairly well and needs to be continued, with specialemphasis on means to broaden the base of income tax payers and much stronger enforcement on tax collection.

While the country has come a long way from being a closed economy to arelatively open one, India still is a highly protected economy by current internationalstandards. In fact, as per the GCR 2001/02, India ranked 74th out of a total of 75countries ranked in the GCR on average tariff rate (%) in 2001. Nigeria is the onlycountry having a higher average tariff rate than India. Excise duties are a major sourceof indirect tax revenue in India and performance in this area has been weak. Ideally, thedomestic indirect tax system should have been converted into a full-fledged VAT,which integrates the tax system from manufacturing down to retail sales, creating a self re-enforcing chain of tax compliance. Experience in other countries shows that a shift

7 Budget Speech of the Finance Minister for the year 2002/03, New Delhi, February 28, 2002.8 Disinvestment in public sector enterprises, closure of loss-making enterprises, reduced bureaucracy,reduced central power sector undertakings support to state electricity boards, and reduction in subsidies,including PDS and transport.9 Central Government Budget for 2002/03



6

to VAT would help improve revenue generation but this is not possible in India under the present constitutional division of powers, whereby excise duties at the productionstage are levied by the Central Government while sales taxes at the wholesale and retaillevel are levied by the States.

In the absence of VAT, India had introduced a modified VAT (called Modvat)under which credit is given for excise taxes paid on inputs against excise taxes due onoutputs thus avoid cascading of excise duties. This system was extended andrationalized during the reforms in various ways. The tax credit facility (Modvatfacility) was earlier not available for all products, but now has universal coverage.Earlier, credit was given only for duties paid on inputs but since 1995 it has beenextended to duties paid on capital goods. These efforts at rationalizing the excise dutystructure were expected to lead to a rising share in the ratio of excise revenue to GDP but in fact excise revenues have declined steadily.

As mentioned before, while it will be necessary to reduce government

expenditure by cutting inessential expenditure, at the same time, it is important toincrease government expenditure in important areas. In our view, the government needsto give greater attention to, and provide larger resources for, education and health. Inthe sphere of raising the literacy levels and providing greater access to basic healthservices, the state governments are required to play a much more enlarged role. On thequality of public (free) schools, India is ranked 62nd in the GCR. Further, looking at theaverage total years of schooling among population aged 15 and above, India ranked 56th out of 63 countries for which data was available in the GCR.

Both the federal and state governments have a particularly urgent and criticalrole in spreading literacy and access to primary health care to all the Indians so thatthey can all participate in a meaningful manner and benefit fully from India’s economictransformation. Much higher levels of literacy could be achieved through creativemobilization of new IT approaches, better school attendance, and other policies, allwith a clear focus on inclusion of girls and other traditionally disadvantaged groups.The economic and social returns from such an initiative would be huge. Evidence fromacross the world suggests that high levels of literacy have helped raise growth rates andreduced fertility rates over time. Additionally, the federal government needs toundertake aggressive public health campaigns to address major infectious diseases(pneumonia, diarrheal diseases, and malaria) and especially the incipient AIDSepidemic, which now threatens India with tens of millions of cases unless properlyaddressed (Bajpai and Sachs 2000).

II. Controlling Inflation:

The first four years of the 1990s registered double-digit inflation based on thewholesale price index, (WPI) with a 13.6 percent peak reached in 1992-93 (Table 2).High fiscal deficits, devaluation of the rupee, periodical increases in administered prices (especially in official procurement and issue prices of food grains), weather



7

conditions, shortages of some commodities of common consumption, and large moneycreation due to acquisition of foreign currency reserves contributed, in varying degrees,and at different points of time, to the relatively higher inflation in the first half of the1990s. However, from 1995/96 onwards, there has been a continuous deceleration andthe average inflation for the period 1996/97 to 2000/01 is by far the lowest since the

mid-1950s in terms of the 52- week average. The point-to-point average inflation ratefor this period is the lowest since the early 1960s.

The developments in the economy since 1996 have been conducive to a declinein the inflation rate. Importantly, on the demand side, there has been a noteworthychange in the source of reserve money creation. Over the decades, monetization of the budgetary deficits by the Reserve Bank of India (RBI) had accounted for a predominant part of reserve money creation and the resultant growth, often excessive, in moneysupply. Since 1996/97, monetization of the budget deficit has declined sharply. During1993 and 1994, primary liquidity was created mainly in the process of the RBIaccumulating foreign currency reserves due to large inflows of foreign investment.

With interest rates rising in most industrial economies, the impact of the Mexican crisisand the steps taken by the government of India to regulate the recourse of Indianindustry to foreign financial markets, these inflows moderated.

As government's borrowing is still very high and demand for commercial creditexpected to pick-up pace, satisfying both the government and enterprise sectors will pose a difficult challenge to the monetary authorities who would like to restrain moneygrowth to keep inflation under check. However, as pressures for reserve money creationabate, the RBI should be in a better position to balance the objectives of economicgrowth and moderation in prices. Satisfactory production of both food and non-foodcrops should keep the inflationary expectations subdued. Supply side managementwould be facilitated by large food stocks10 and high foreign exchange reserves11 (Table2). Releases of food stocks into the open market and through the public distributionsystem should keep cereal prices under check. The public stocks can also be used for food-for-work programs. Commodities such as sugar, edible oils and cotton, whichwere in short supply in the mid-1990s, have already been placed on the open generallicense and are thus freely importable.

III. Reforms in the Trade and Foreign Investment Regimes:

The set of policies regarding the external sector including devaluation of therupee, making the rupee convertible on current account, liberalization of the traderegime, allowing imports of gold, encouraging foreign direct investment (FDI) andtechnology inflows, opening the capital market to portfolio investment by foreigninstitutional investors (FIIs), and permitting domestic companies to access foreigncapital markets have brought about a dramatic turnaround and steady progress in the

10 58 million tonnes as of January 2002.11 $46.56 billion as of January 2002, providing cover for about 10 months of estimated imports in2001/02.



8

balance of payments. The export-import ratio improved from 66.2 percent in 1990/91 to75.8 percent in 2000/01. Merchandise exports rose from $18.4 billion in 1990/91 to$44.8 billion in 2000/01. Non-oil imports over the same period rose from $21.8 billionto 43.6 billion, but the current account deficit remains at less than one percent of GDP(Table 6).

Trade and Exchange Rate Policies:

The past import substitution policies characterized by pervasive quantitativerestrictions on imports and steep customs duties have undergone change. Quantitativerestrictions on imports of capital goods, intermediates and raw materials have beenabolished. These, however, survive in the case of final consumption goods thoughgradual relaxation is underway. Customs duties have been reduced gradually. Themaximum duty rate has declined from 250 percent to 30 percent. Tariffs on most capitalgoods, plants and machinery now stand at 20 percent as against 80-85 percent earlier.Duties on intermediates and raw materials have also been lowered. The process is still

continuing so that the Indian tariff structure would be in line with that in most other developing countries, though it has been rather slow. Liberalization of trade hasreduced costs of Indian industry, relieved production bottlenecks, promoted technologyup gradation and export orientation and, encouraged competition. The gradual tradeliberalization has enabled domestic industry to adjust to the new situation. Thoughapprehensions persist in some quarters about external competition, the Indian industryhas generally accepted the need for, and logic of, the ongoing change.

The removal of quantitative restrictions and reduction in tariff levelsimplemented over the 1990s would not have been possible but for parallel changes inexchange rate policy. The rupee was devalued in July 1991 by 24 percent as part of theinitial stabilization program, and a dual exchange rate was introduced briefly fromMarch 1992 to March 1993. In March 1993, the dual exchange rate was unified and theunified rate was allowed to float. The flexible exchange rate regime has workedreasonably well with the exchange rate responding to market conditions while the RBIintervenes periodically through foreign exchange sales and purchases or throughmonetary fine-tuning to maintain orderly market conditions. Exchange ratemanagement has avoided the danger of excessive rigidity and also the opposite dangersof overshooting with associated loss of confidence. Although there is no declared realeffective exchange rate target, the system has worked in a manner to preserve theadvantageous real exchange rate achieved in the early years of the reforms.

Motivated by the success of Chinese Special Economic Zones (SEZs), ShannonFree Trade Zone in Ireland and the like, the Government of India introduced SEZs inIndia through the Export/Import Policy of 2000. Since then approval has been given toestablish twelve SEZs in the following nine states: Gujarat, Orissa, Karnataka,Maharashtra, Tamil Nadu, Madhya Pradesh, West Bengal, Uttar Pradesh, AndhraPradesh. Notably Positra SEZ in Gujarat, Gopalpur SEZ in Orissa and Nanguneri SEZin Tamil Nadu are being implemented with private sector participation. This new policyhas been introduced with a view to provide an internationally competitive and hassle



9

free environment for exports. Units may be set up in SEZ for manufacture, trading, re-conditioning, and repair or for service activity. All the export/import operations of theSEZ units will be on self-certification basis. The units in the Zone have to be a netforeign exchange earner but they shall not be subjected to any pre-determined valueaddition or minimum export performance requirements. Sales in the Domestic Tariff

Area by SEZ units shall be subject to positive foreign exchange earning and on payment of full Customs duty. The policy provides for setting up of SEZs in the public, private, joint sector or by State Governments. It was also envisaged that some of theexisting Export Processing Zones would be converted into Special Economic Zones.

In a major initiative to boost export-led growth, the new five-year Exim Policyof 2002-07 has lifted all quantitative restrictions on exports, and announced moreincentives for SEZs and schemes like Duty Entitlement Pass Book (DEPB), advancelicense, and Export Promotion Capital Goods (EPCG). The policy also provides anincentive package for the hardware sector, simplifies procedures to reduce transactioncosts besides adopting new commodity classification for imports and exports.

Coterminous with the Tenth Five-Year Plan, the policy comes a year after thequantitative restrictions were dismantled on imports.

With the lifting of quantitative restrictions on exports, the policy has made a paradigm shift on its focus from import-liberalization to export-orientation. In animportant decision to make SEZs globally competitive, the overseas banking units(OBUs) would be permitted to be set up in these zones for the first time in India. Theseunits would be virtually foreign branches of Indian banks but located in India. TheseOBUs would also be exempt from the normal Reserve Bank of India regulations likethe cash reserve ratio and statutory liquidity ratio. They would give the SEZ unitsaccess to international finance at global rates.

India’s balance of payments has improved considerably since the deficit in theinvisible account in the early 1990s has been converted into a surplus as a market-determined exchange rate of the rupee has encouraged inward remittances through legalchannels (Table 6). There has been an unprecedented build up of foreign currencyreserves during the second half of the 1990s. The build up of foreign currency assets of the RBI, which stood at $46.5 billion as of January 2002, reflect the steep decline in thecurrent account deficit as well as large net capital inflows. The composition of theseinflows has changed significantly towards equity and away from debt. Externalassistance, external commercial borrowing, IMF loans, and non-resident Indian (NRI)deposits declined progressively from 85.8 percent of net capital inflows in 1990-91 to40 percent in 1993-94 and further to 23 percent in 1999/00.

The improvement in the balance-of-payments has enabled the government tosubstantially reduce the growth of external debt. The debt-GDP ratio declined steadilyfrom the high of 38.7 percent in March 1992 to 22.3 percent in March 2001 (Table 7)and further to 21 percent at the end of September 2001. Similarly, the debt service ratiodeclined from a peak level of 35.3 percent of current receipts in 1990/91 to 17.1 percentin 2000/01. The short-term debt declined from $8.5 billion in March 19991 to $3.4



10

billion in March 2001, representing a decline in the share of short term to total debtfrom 10.2 percent to 3.5 percent. Similarly, the proportion of external commercial borrowings and costly NRI deposits in total debt has also declined. The share of concessional debt in total external which was steady around 45 percent during the firsthalf of the 1990s, declined to 36 percent in March 2001.

Foreign Investment Policy:

The foreign investment policy was reformed and accordingly foreign investmentwas actively sought. Both foreign direct investment and portfolio flows have beenencouraged in the post-reform period with some positive results in both cases. The process of approving FDI was expedited by providing a window of automatic approvalof FDI. Foreign investment proposals, which are not eligible for the automatic route,can obtain approval from the Foreign Investment Promotion Board (FIPB). As a result,inflows of foreign investment (FDI, foreign institutional investment, (FII) and Euroequities) increased from a mere $103 million in 1990/91 to $4.1 billion in 1993-94 to

further to $5.0 billion in 2000/01 (Table 8). Approvals for FDI have witnessed sharpincreases too. The total FDI approved between 1991 and 2001 amounts to $56.2 billion,against just under $1.0 billion approved during the previous decade. However, theactual FDI inflows have been much smaller relative to the approvals. Total inflows between 1991 and 2001 were placed at 17.9 billion, about 31.8 percent of the totalapprovals. FDI inflows rose from $129 million in 1991-92 to $1314 million in 1994-95and further to $2339 million in 2000/01.

Expeditious translation of approved FDI proposals into actual investmentrequire more transparent sectoral policies, bidding and selection procedures, and adrastic reduction in time-consuming redtapism12. The states are becoming increasinglyinterested in attracting both domestic and foreign investment and should expedite their decision-making processes, especially for provision of land, electricity, water and other infrastructural services to investors. Infrastructural projects on which survey and projectwork has already been done could be offered to prospective investors.

With the initiation of economic reforms in 1991, the role of private investmenthas acquired a great deal of significance. Indian states are now in competition with oneanother to attract private investment, both domestic and foreign. Within states, the flowof investment has tended to be skewed in favor of the urban areas. State-level data onFDI approvals suggest that the relatively fast growing states have tended to attracthigher levels of foreign direct investment. The top five states that received the highestinflow of FDI in the country, per June 2001 data, were Tamil Nadu (29.9 percent of thetotal inflows), Maharashtra (21.7 percent), Delhi (19.8 percent), Andhra Pradesh (13.3

12 Based on a study of 1099 manufacturing companies, spread across ten large states in India, a CII-World Bank study found that firms in India spent close to 16% of management time in dealing withgovernment and other sundry officials as against 9% in China, 8.3% in the transition economies of Eastern Europe and just 4.3% in Latin America.



11

percent), and Karnataka (7.5 percent)13. Gujarat, with a population of 50 million,received over a fifth of domestic private investment proposals, whereas Bihar with a population of 83 million barely managed a share of 5 percent of such proposals.Maharashtra and Gujarat account for 37 percent of total investment proposals, whileBihar, Madhya Pradesh, Orissa, Rajasthan and Uttar Pradesh, taken together, were able

to attract only 26 percent of investment proposals.

Following the Mexican crisis questions were raised whether India could facesimilar problems due to volatility of some of the capital inflows. Though the two casesare not comparable (India's current account deficit of less than one percent of GDP andshort-term debt at 3.4 percent of total external debt are way below the Mexican currentaccount deficit of 8 percent of GDP and short-term to total external debt proportion of over 30 percent) it is important for India to persist with sound macro-economic policies, avoid overvaluation of the rupee, maintain a reasonably high level of foreigncurrency reserves to cushion disruptive outflows, and encourage FDI. Of the non-debtcreating inflows, priority should attach to FDI, which is long-term in character and also

brings technology, management and marketing inputs. The authorities are striving to pursue these policies. Pending further improvement in the macroeconomic situation,they have adopted a cautious approach to the question of the rupee's convertibility onthe capital account.

As economic growth acquires further momentum and the investment-saving gapwidens, equity inflows through global depository receipts (GDRs) and Euro-convertible bonds could be further encouraged without triggering inflationary pressures. Over dependence on volatile FII should, however, be avoided. India's balance of payments isnow underpinned by fairly sound exchange rate and trade policies as well as substantialforeign exchange reserves, and can be regarded as eminently viable over the mediumterm. The fiscal position, however, needs much more improvement. Inflation is likelyto stay at low levels. All this should presage sustainable economic growth in thecoming years provided, of course, the saving and investment picture remainssatisfactory.

IV. Reforms in the Industrial Policy Regime:

Industrial licensing was a major instrument of control under which centralgovernment permission was needed for both investment in new units (beyond arelatively low threshold) and also for substantial expansion of capacity in existing units.Licensing was undoubtedly responsible for many of the inefficiencies plaguing Indianindustry. In a series of steps, licensing was abolished for all except 7 industries viz.alcoholic beverages, sugar, cigars and cigarettes, electronics, aerospace and defense products, hazardous chemicals and pharmaceuticals. The special permission neededunder the Monopolies and Restrictive Trade Practices (MRTP) Act for any investment by the so-called “large houses” which was an additional instrument of control over large houses, in addition to industrial licensing was also abolished. Its stated objective

13 Secretariat for Industrial Approvals (SIA) Newsletter, July 2001, Ministry of Industry, Government of India.



12

was to prevent “concentration of economic power” but in practice it only served asanother barrier to entry, reducing potential competition in the system. Abolition of these controls has given Indian industry much greater freedom and flexibility to expandexisting capacity, or to set up new units in a location of their choice, thus increasing the pressure of competition as well as the ability to face competition.

With the opening up of the Indian economy, the country’s informationtechnology industry has been the biggest beneficiary. Between 1995 and 2000, theIndian IT Industry recorded a CAGR of more than 42.4 percent. Software continues tocontribute a major portion of the Indian IT industry's revenues. India’s exports of computer software beat global recession in 2001-2002 (April-March) to grow by ahealthy 31.4 percent14. In absolute terms, software and services exports went up to$7.875 billion in 2001/02 as against $5.978 billion in 2000/0115. The steady growth inexports of software is the combined effect of software giants setting up bases in India tomeet their global software requirements in the aftermath of September 11, gradualmarket penetration that India is making in the non-traditional markets like the EU,

Australia, Japan and China, and the increased receivables from IT enabled services like back office operations. India’s exports of electronics hardware grew by 13.6 percent in 2001/02 to

$1.183 billion from $1.041 billion in 2000/01. The IT manufacturing industry has over 150 major hardware players supported by over 800 ancillary units and small timevendors engaged in sub-assemblies and equipment manufacturing. The combinedexport of software and services, and electronics hardware registered a growth of 28.7 percent in 2001/02. In absolute terms, India’s overall IT exports grew to $9.04 billion in2001/02 from $7.019 billion in 2000/01. In 1999/00, more than 185 of the Fortune 500companies outsourced their software requirements to Indian software houses. India’ssoftware industry shows the clustering of the software companies in three distinct areas:the southern states specifically Tamil Nadu (Chennai, Madurai, Coimbatore andTrichy), Karnataka (essentially confined to Bangalore), and Andhra Pradesh(essentially confined to Hyderabad), in the west, Maharshtra (Mumbai and Pune), andin the north, Delhi, Noida and Gurgaon. Software companies located in these regionsaccount for almost the entire software and services exports of the country, highestnumber of firms and employment in the sector.

Public Sector Policy:

Many areas previously reserved for the public sector have been opened up to the private sector. Although its share has declined in the past ten years, the public sector

still accounts for 25 percent of India’s GDP, 31 percent of capital investment and 17 percent of the final consumption expenditure in the country. At the start of the reforms18 important industries, including iron and steel, heavy plant and machinery,telecommunications and telecom equipment, mineral oils, mining of various ores, air transport services, and electricity generation and distribution, were reserved for the

14 Estimates of the Electronic and Computer Software Export Promotion Council (ESC).15 This represents 13.3% of India’s manufacturing exports.



13

public sector. This list has been reduced to 6, covering industries as arms andammunition, atomic energy, mineral oils, atomic minerals and railway transport.Because of this liberalization, private investment including foreign investment hasflowed into areas such as steel, telephone services, electricity generation, petroleumexploration development and refining, coal mining and air transport, none of which

would have been possible earlier because of public sector reservation. Part of thegovernment equity in selected public sector enterprises is being disinvested16. Whilesuch disinvestment helps reduce the fiscal deficit, it does not indicate a change inmanagement as government intends to remain a majority stakeholder in public sector enterprises.

Public sector reforms have done little in the cases of units that have been lossmaking. These units have been making losses for a very long period of time and arevery unlikely candidates for revival. The successive governments have ruled outclosure of these units and decided instead that the scope for reviving each unit would becarefully examined and only those units where revival was found to be economically

feasible would be revived while others would be closed down. Many sick public sector units have been referred to the Board for Industrial and Financial Reconstruction(BIFR) for rehabilitation or, where necessary, for winding up. The latter option has been rarely exercised. The public sector is still hamstrung by excessive government and bureaucratic controls. The option of privatization has not yet been seriously considered.Several public sector units have been identified as fit for closure through this process,and subsequently the government has even decided on closure in many cases, but nounit has been actually closed because the decision has been challenged in the courts bylabor unions.

An important area where domestic liberalization has made very little progress is the policy of reserving certain items for production in the small-scale sector. The policy “protects” small-scale units by barring the entry of larger units into reservedareas. It also prevents existing small-scale units from expanding beyond a maximum permissible value of investment in plant and equipment. India is unique in adoptingreservation for small-scale producers and the policy obviously entails efficiency lossesand imposes costs on consumers. Several committees have recommended variousdegrees of dilution of the reservation policy. An Expert Committee on SmallEnterprises set up in 1995 has recommended that reservation should be completelyabolished and efforts to support small scale producers should focus instead on positiveincentives and support measures. None of the governments in the post-reforms periodhas been inclined to accept a drastic re-orientation of policy along these lines.

The present regulations for retrenchment of surplus labor are far too rigid.While the government has made some progress on this front by proposing to allow

16 Between 1991/92 and 2001/02, the total disinvestment proceeds have totaled Rupees 253 billion out of a targeted Rupees 660 billion. During 2002/03, the government has listed strategic sales of oil refinersBPCL and HPCL, petrochemical firm IPCL, Shipping Corporation of India, carmaker Maruti and National Aluminum Company as a few of its big ticket sell-offs.



14

companies with no more than 1000 employees17 to retrench labor without prior permission of the government, but this amendment to the Industrial Disputes Act(IDA), 1947, is yet to get Parliamentary approval. Similarly, industrial units requiregovernment permission before they can close down and such permission is rarelysecured. There has been no progress whatsoever on putting in place an exit policy for

firms. In this context, it is noteworthy that while the industrial policy reforms in Indiahave removed virtually all the entry barriers that had existed prior to 1991, however,not allowing firms to exit, if their business conditions so demand, is an entry barriers initself.

V. Reforms in the Financial Sector:

India’s financial system has vast geographical and functional reach, capacity tomobilize savings, institutional diversity, and large trained manpower. However, over time, the system has developed weaknesses due to state ownership of bank’s andinsurance companies, its rapid expansion, externally induced constraints on bank

profitability, an over-regulated interest rate regime, and internal organizationaldeficiencies. Profitability in the banking sector has been very low and some banks have become financially weak. The reform of the banking sector has only addressed these problems partially. It has however sought to develop the money market as well as asecondary market in long-term government debt.

Very high statutory liquidity requirements thr ough which banks are compelledto invest in government securities have been reduced18. Government paper now carriesmarket-clearing rates. There is only one ceiling rate on term deposits prescribed by theRBI. Interest rates on money market instruments have been freed. With governmentsecurities now carrying market rates, the basic requirement for developing a secondarymarket in such paper has been met. Institutions and fora have been created to helpdevelop trade in money and long-term debt markets. To improve the working of banks,a strong prudential regime regarding capital adequacy, income recognition, loan-loss provisions and transparency of accounts has been established. Profitable banks have been permitted to access the capital market to augment their capital.

Commercial banks are increasingly entering new businesses such as merchant banking, underwriting, mutual funds and leasing, usually through subsidiaries. Effortsare on for expediting computerization of bank operations. To enhance competition,many new private sector banks, including some more foreign banks, have been allowedentry into the market. RBI’s supervision over commercial banks and other financialinstitutions including non-bank financial companies has been strengthened. One of thecritical areas where banking sector reforms have not progressed relates to governmentcontrol over public sector banks. Public sector ownership imposes several constraintsincluding limitations in methods of recruitment and promotion and restrictions on thesalaries they can pay. Public sector banks are also burdened by standards of public

17 Prior to this proposed change, firms with no more than 100 employees were only permitted to retrenchlabor without governmental permission.18 Indian banks must maintain 25% of their demand and time deposits in government securities.



15

accountability, which may be inconsistent with the degree of flexibility needed for commercial decision-making. The Committee on Banking Sector Reforms hasrecommended that the government’s equity holding should be reduced to 33 percent.However, no action on this recommendation has been taken so far.

Over the last two decades, the capital market has grown phenomenally in termsof capital raised, listed companies, trading volumes, market capitalization, and investor base. The number and diversity of market intermediaries - merchant banks,underwriters, custodians, share registrars and transfer agents, mutual fund, ratingagencies etc. - have grown rapidly. There are 23 stock exchanges. The Over-theCounter Exchange of India (OTCEI) and the National Exchange have screen basedtrading and are developing a nationwide reach. The capital market has been liberalized.Corporates are now free to issue capital and price their issues. FIIs (about 280 innumber) have been permitted to invest in the Indian market and about 80 of them arequite active. Many Indian companies are accessing foreign markets for raising equityand debt finance.

The regulation of the primary and stock markets as well as of stock exchangesand market intermediaries has been strengthened through the establishment of theSecurities and Exchange Board of India (SEBI). SEBI is trying to control insider trading, regulate large acquisition of shares, and improve the trading practices in stock exchanges. It has been able to revamp the governing boards of stock exchanges, whichwere predominantly the domain of the broker community. Though the primary markethas grown dramatically, the stock market infrastructure, practices and procedures arerelatively inadequate and slow. Many market intermediaries also lack sufficientcapacity to handle growing business and paper work. Share transfers take considerabletime. A major challenge is to expand the market infrastructures, upgrade technology,and establish institutions and practices for reducing paper work and delays.

Apart from the National Exchange and OTCEI, the Bombay Stock Exchangetoo has screen based trading. Measures are also underway to improve clearing andsettlement procedures and to establish a national depository system with a view tomoving towards scrip less trading in due course. This would require several changes inexisting laws. Though it will take considerable time to achieve a desirable level of reform of the financial sector, some progress has been made. Based on therecommendations of the Committee on Reform of the Insurance Sector, the governmenthas opened up the insurance industry to domestic and foreign companies with a view tointroduce competition in insurance industry, which, for some decades, had been agovernment monopoly.

VI. India’s Business Environment: Comparative Survey Results from GCR 2001/02

GCR 2001/02 carried a survey of business leaders in 75 countries of the world,to explore the comparative business environments of the major economies. The GCR focuses on two distinct but complementary approaches. The first one is a growthcompetitiveness index, (GCI) which focuses on global competitiveness as “the set of



16

institutions and economic policies supportive of high rates of economic growth in themedium term.” The second one is a current competitiveness index, (CCI) which focuseson microeconomic indicators to measure the “set of institutions, market structures andeconomic policies supportive of high current levels of prosperity,” referring mainly toan economy’s effective utilization of its current stock of resources. The survey results

are combined with other quantitative data (e.g. objective measures of infrastructure,saving rates, financial market depth, educational attainment, etc.) to produce an overallassessment of international competitiveness, which the study defines as the ability toachieve rapid growth over the medium term.

In the 2001 GCR, India ranks a relatively disappointing 57th out of 75 countriesin growth competitiveness, slipping below from the rank of 48th in the 2000 Report. Oncurrent competitiveness, India ranks 36th in 2001, little change from the rank of 37 th inthe 2000 Report. Notable competitive advantages for India include large availability of scientists and engineers, strong potential for “Catch-up” growth, easy access to credit,low exchange rate premium, strong IT training and education, local availability of

information technology services, and government success in ICT promotion, quality of management schools, among others (Table 9).

There are, however, many more competitive disadvantages. Notable amongthese are: lack of access to foreign capital markets, high average tariff rate, stringenthiring and firing practices, high government deficit, extensive distortive governmentsubsidies, permits and time taken to start a firm, large-scale irregular payments in taxcollection and government procurement etc. The areas of weakness point implicitly tothe most urgent points of the reform agenda. First, despite the importance of the stock exchange, India’s financial markets are deficient. The overall sophistication of thefinancial system is low. Venture capital, which is key to the start up of new industries,is particularly weak. Second, administrative regulations have strongly constrained business activities (the license Raj continues); state subsidies have inappropriately been protecting old industries; the civil service is unduly politicized; and tax evasion isrampant.

Third, and perhaps most strikingly, the quality of infrastructure is abysmal.This is true in all areas: roads, ports, power, and telecomms. For instance, India ranked69th out of the 75 countries ranked on telephone lines per 100 inhabitants; 73 rd on roadquality outside of major cities; 57th on port facilities and inland waterways; and 47th onthe quality of air transport infrastructure19. Fourth, the research and development nexusis very weak, with little collaboration between business and academia, and little successin commercializing or adopting new technologies. This poor outcome is ironic in viewof the praise for India’s science and engineering prowess. Fifth, labor markets areineffective, perhaps the most ineffective in the world. Put briefly, India shows theadvantages of a vast labor force with a skilled engineering and scientific community. Italso shows, however, deficiency in both the hard infrastructure, such as roads, ports,and power, as well as the soft infrastructure of public administration, labor market practices, and financial market depth.

19 For details on the investment required in each of these sectors, refer to the India Infrastructure Report.



17

VII. The Unfinished Reform Agenda:

The step-up in India's growth rate in the 1980s was partly due to allocativeefficiency gains arising from the rather limited deregulation and halting liberalization of only a few aspects of the then prevailing control regime. The continuing structural

change in industrial, trade and financial areas, among others, is much wider and deeper and has contributed more meaningfully to higher productivity of the economy. Thisreinforces the probability of the country registering sustained high levels of economicgrowth. Indeed, there is potential for growth of 7-8 percent per year (Bajpai 2001). It isnecessary to move swiftly to complete many of the reforms, which are now underway.Examples of such continuing reforms are the reduction in protection levels, continuingreforms in banking, sector, product de-reservation for the small-scale industry,decontrol of prices, such as petroleum, reform of the power sector and so on. Amongother things, sustaining higher rates of economic growth would require a more vigorous pursuit of economic reforms at both the federal and state levels.

Significant reduction of fiscal deficit is the first order of business. Unlesssubstantial fiscal consolidation is achieved, in our view, continued fiscal deficits poseIndia’s greatest risk to future destabilization. Despite several years of fiscalconsolidation effort, large and persistent fiscal deficits remain. India’s overallgovernment spending, currently around 33 percent of GDP (center and states together)will need to be brought down substantially as a proportion of national product in order for India to achieve its reform goals of macroeconomic stability and long-term rapidgrowth. Government dis-savings at the federal and state levels need to be reducedthrough cuts in, and refocusing of, explicit and implicit subsidies, stricter control of non-developmental expenditure, improvement in the tax ratio through deepeningreform of the indirect tax regime and stronger tax enforcement. Lower fiscal deficitswill help move towards a regime of low interest rates, which, with efficient financialintermediation, can give a boost to private sector investment.

Privatization of India’s state-owned enterprises (SOEs) is critical. Many of theSOEs are inefficient and loss-making firms. These firms tend to be protected by grantsof state monopoly, especially in areas of finance, such as commercial banking andinsurance, and infrastructure, in areas such as telecommunications, port facilities, androad building. An end to the state monopolization of these sectors is crucial to permitnew, privately owned firms to introduce competition and higher productivity into thesesectors. Privatization of these enterprises is also desirable in most cases, since thegovernment has no particular comparative advantages in running these enterprises, andmay severe disadvantages (especially the politicization of key investment andemployment decisions of the enterprises).

Reforms to further opening up of the economy to trade and FDI are crucial if India is to sustain high rates of economic growth. India’s average tariff rate of 27 percent vastly exceeds the average tariff rates of the other economies. India alsodisplays continuing high barriers to foreign direct investment in contrast to most of thefast-growing Asian economies. While it is true that not all of East Asia relied heavily



18

on foreign direct investment to achieve rapid growth: Japan and Korea are the two mainexceptions. But most of the region, especially in Southeast Asia, has relied heavily onFDI (Bajpai and Sachs, 1997b), and the East Asian countries tend to have much simpler rules for FDI approvals than are now in place in India.

If India has to become an attractive destination for FDI and a major platform for labor-intensive manufacturing exports, reforms in India’s labor laws and exit policiesare extremely essential. China’s experience suggests that while workers in the Chinesestate sector are accorded generous job guarantees, workers in the non-state sector donot receive guaranteed employment. By contrast, in India, workers in both the publicand the private sector, once employed, cannot be laid off without governmental permission. As a result of liberal hiring and firing policies in China, there has beenrapid growth of employment, since firms can hire workers without fear of being stuck with unwanted labor in the future due to restrictions on dismissals. Formal sector employment in China has increased dramatically, from 95 million in 1978 to 158.5million in 2000. India, by contrast, has experienced a meager increase from 22.9

million in 1978 to 27.9 million in 2000, of which 19.3 million are employed in the public sector 20. Similarly, reform to put in place an exit policy for firms is significant inthe Indian context. An exit policy needs to be formulated such that firms can enter andexit freely from the market. While the policy should recognize the need and potentialmerit of certain safeguards, if wrongly designed and/or poorly enforced it would turninto a barrier that may adversely affect health of the firms.

India has so far made little progress in commercializing the key infrastructuralsectors. In power, for example, most electricity continues to be a public-sector monopoly, run by state electricity boards (SEBs). The SEBs are responsible for generating and distributing power, setting tariffs, and collecting revenues. Almost allof the SEBs make losses and some are even unable to pay for coal or the power they purchase. This is due to the fact that SEBs implement social subsidy policies of stategovernments leading to inefficient patterns of energy consumption, and even to non-recovery of their own costs. Also, there is considerable theft of power from thedistribution networks. SEBs had accumulated dues of Rs. 414 billion, with interestamounting to Rs. 157 billion, as of February 200121. Tariff reform, i.e. higher pricesactually collected on electricity use, is the first order of business. Privatization of power generation, and the conversion of SEBs from electricity providers to marketregulators would come next. Power capacity will not be expanded until the SEBs arefundamentally overhauled or eliminated. Even private power projects currently areexpected to sell their electricity to the SEBs as their only power purchaser, so that the

20 A mere 4.6% of India’s working-age population of around 600 million is employed in the formalsector.21 In March 2002, the federal Government approved a scheme of one-time settlement of the outstandingdues of the SEBs in order to ensure timely payment of dues by SEB to central public sector undertakings.The scheme includes waiver of 60% of the surcharge/interest on delayed payments, for states participating in the scheme. The rest of the dues amounting to the full principal amount, as well as theremaining 40% of the surcharge/interest would be securitized through bonds issued by the respectivestate governments.



19

bankability of private sector power projects depends fundamentally on the financialhealth of the SEBs.

There is no doubt that geography heavily influences economic performance.Both in China22 and to a lesser extent in India, the real economic success has come in

the coastal provinces/states, which can take advantage of export-led growth (Sachs,Bajpai and Ramiah, 2002). The interior has done much less well. Refer to Table 10 for poverty ratios at the state level in India with urban rural classification. GDP growth inthe hinterland has lagged behind the coastal states by several percentage points per year. There is a vast amount of economic reform that can be carried out to improveconditions in rural India, especially in the Gangetic valley. There is no reason for expensive and counter-productive charity for the northern states, and still less any casefor holding back the fast-growing coastal regions. In India, Tamil Nadu, Maharashtraand Gujarat have the potential to grow as the fastest growing Chinese coastal provincesof Fujian, Zhejiang and Jiangsu.

Perhaps the key step in the Gangetic plain is to improve the most basicinfrastructure so that the vast rural populations can take part in more rapid nationaleconomic growth. They will do so through increased exports to coastal states, andgreatly improved productivity for local production. We should stress that while China’shinterland has lagged behind the coastal regions, the Chinese hinterland too has enjoyedrapid economic growth. The state governments need to adopt a strategy for rural India,in which there will be a reliable infrastructure supplied at commercial prices rather thangiven for free. The government’s commitment, both at the national and state levelshould be that every village will be assured at least clean water, a road to the regionalmarket, reliable power, and minimal telephone service; but that every village will beresponsible for covering the commercial costs of those services on a normal user-fee basis. In particular, Bihar, Uttar Pradesh, and Orissa are in desperate need of reform.

Bihar is the most underdeveloped state of India, perhaps followed by Uttar Pradesh23. These states are land locked and have very high birth and death rates, poverty ratios, illiteracy and maternal mortality, and infant mortality rates. These statesalso have very low rates of school enrolment and their per capita net state domestic product is among the lowest in the country. As high as 42.6 percent of Bihar’s population and 31.1 percent of Uttar Pradesh’s population was below the poverty linein 1999/00. Among the other major states, Orissa and Madhya Pradesh have very high poverty ratios.

The 2001 census highlighted the grave demographic situation of Uttar Pradesh.Sixteen percent of India’s population lives in Uttar Pradesh, although the state accountsfor only 7.5 percent of the country’s total area. In March 2001, the state’s population

22 For China, refer to Demurger et al. (2002)23 Of the ten Prime Ministers’ that India has had since independence, six of them have come from Uttar Pradesh and in addition, of the 425 Members of Parliament in the Lok Sabha (lower house), 85 of themcome from Uttar Pradesh. Bihar accounts for 58 Members of Parliament, second highest after Uttar Pradesh.



20

was a placed at 166 million24, with a very high population density - 689 persons per square kilometer. The state’s population density is more than twice the nationalaverage, which is 324. Uttar Pradesh’s population has increased almost three timessince independence. It is increasing at the rate of 2.3 percent per year, up from 2.28 percent during 1981-91. That is, Uttar Pradesh is now adding about 3.8 million people

per year. If the population growth rate in the state is not checked, in 30 years, Uttar Pradesh’s population would have reached 340 million, which was the population of theentire country after partition in 1947.

On the political front, while there seems to be some degree of consensus on the basic direction of reforms, however, there have been several instances when the political parties have supported reforms when in power, and opposed them, when inopposition. Since 1991, every ruling party has supported reforms while the same partywhen in the opposition has tried to block them. For instance, the BJP opposed theopening-up of the insurance industry when the Congress wanted to do so, and later theCongress opposed the same reform when the ruling BJP wanted to open-up the

insurance industry. Of course, the Congress agreed eventually and the insurancereforms went through25. Similarly, the BJP had a tough time privatizing a state-ownedAluminum firm Balco as the Congress opposed this move. Once again, even though thefirm did get privatized, it was not until a Supreme Court judgment came through. Animportant aspect of the unfinished agenda should therefore be wide dissemination of information and debate about the necessity of reforms, which should include a frank discussion on some its temporary negative consequences and ways of ameliorating their impact.

In conclusion, a decade of opening of the economy has produced newdynamism, most dramatically in the information technology sector, but in others aswell. The new technologies (especially information technology and biotechnology)give new opportunities for economic and social development. The reformsimplemented so far have helped India attain 6 plus percent growth, however, shouldIndia be able to implement these remaining reforms and re-orient governmentalspending away from inessential expenditures towards high priority areas of health andeducation and infrastructure development, then it is very likely to attain and sustaineven higher rates of economic growth. If India does grow consistently at around 7/8 percent per year, this is likely to push up its domestic savings in the next few years.Besides, stronger growth should attract more foreign savings, especially foreign directinvestment, and thus raise the investment rate.

24 If Uttar Pradesh were to be a separate country, it would be the sixth most populous country in theworld after China, India, United States, Indonesia and Brazil.25 This could not have been possible but for the untiring efforts of Dr. Manmohan Singh who convincedhis party, the Congress, to support the legislation for opening-up the insurance industry in the Upper House of the Parliament (Rajya Sabha), where the Congress has a majority.



21

REFERENCES

Ahluwalia, Isher and I. M. D. Little, (1998). “India’s Economic Reforms and Development – Essays for Manmohan Singh”, Oxford University Press, New Delhi.

Bajpai, Nirupam, (2001). “Sustaining High Rates of Economic Growth in India”, CID WorkingPaper No. 65, Center for International Development, Harvard University.

Bajpai, Nirupam and Jeffrey D. Sachs, (2000). “India’s Decade of Development”, CIDWorking Paper No. 46, Center for International Development, Harvard University.

Bajpai, Nirupam and Jeffrey D Sachs, (1997a). “Fiscal Policy in India's Economic Reforms”,Harvard Institute for International Development, Development Discussion Paper No. 577,Conference Paper Series, Harvard University.

Bajpai, Nirupam and Jeffrey D Sachs, (1997b). “India’s Economic Reforms: Some Lessonsfrom East Asia”, Journal of International Trade and Economic Development, 6:2.

Chelliah, Raja, (1996). “Towards Sustainable Growth: Essays in Fiscal and Financial Sector Reforms in India”, Oxford University Press, New Delhi.

CMIE, Economic Intelligence Service, (2002). Public Finance.

Demurger, S, Jeffrey D Sachs, Wing Thye Woo, Shuming Bao, Gene Chang, and AndrewMellinger. (2001) “Geography, Economic Policy and Regional Development in China”, CIDWorking Paper No. 77, Center for International Development, Harvard University, forthcomingAsian Economic Papers, MIT Press, Vol. 1, No. 1.

Global Competitiveness Report, 2001/02, (2002). World Economic Forum and the Center for International Development, Harvard University, Oxford University Press.

Government of India, Ministry of Finance, (2002). Finance Minister’s Budget Speech, NewDelhi.

Government of India, (2001). Census of India – Provisional Population Totals, Series 1, NewDelhi.

Government of India, Economic Survey, Ministry of Finance, various issues.

Government of India, Planning Commission, (2000). “Mid Term Appraisal of Ninth Five Year Plan (1997-2002)”, New Delhi.

Government of India, National Accounts Statistics, Central Statistical Organization, variousissues.

Government of India, Department of Economic Affairs, Ministry of Finance, (1993).“Economic Reforms – Two Years After and the Tasks Ahead”, Discussion Paper, New Delhi.

India Infrastructure Report, (1996). Volumes I, II, and III - Policy Imperatives for Growth andWelfare, New Delhi.



22

Jalan, Bimal, (1996). “India’s Economic Policy: Preparing for the Twenty-First Century”,Viking Penguin India, New Delhi.

Joshi, Vijay and I.M.D. Little, (1996). “India’s Economic Reforms – 1991-2001”, OxfordUniversity Press, New Delhi.

Reserve Bank of India, Report on Currency and Finance, various issues.

Sachs, Jeffrey, Nirupam Bajpai, and Ananthi Ramiah (2002). “Understanding RegionalEconomic Growth in India”, CID Working Paper No. 88, Center for InternationalDevelopment, Harvard University. Also, forthcoming in Asian Economic Papers, MIT Press,Vol. 1, No. 2.

Sachs, Jeffrey and Nirupam Bajpai, (2000). “The Decade of Development: Goal Setting andPolicy Challenges in India”, CID Working Paper No. 62, Center for International Development,Harvard University.

Sachs, Jeffrey, Ashutosh Varshney, and Nirupam Bajpai, (1999). “India in the Era of Economic

Reforms” Oxford University Press, New Delhi.

Shome, Parthasarathi, (1997). “Value Added Tax in India – A Progress Report”, NationalInstitute of Public Finance and Policy, New Delhi.

Srivastava, D.K., and Tapas K Sen, (1997). “Government Subsidies in India”, National Instituteof Public Finance and Policy, New Delhi.



23

Table 1: Trends of Major Macroeconomic Indicators: 1990-91 --- 2001-02

ITEMS 1990-91 1991-92 1998-99 1999-2000 2000-01 2001-02

1. Growth rates (per cent):GDP at constant factor costIndustrial production (IIP)

of which, ElectricityAgricultural production (crop index based)Food grain productionExports (BOP in terms of US $)Imports (BOP in terms of US $)

of which POL

5.68.27.83.83.19.014.460.0

1.30.68.5-2.0-4.5-1.1-24.5-11.7

6.54.16.57.65.9-3.9-7.1-21.6

6.1 P6.77.3-0.93.09.516.597.1

4.0 Q5.04.0-6.6P-6.6 P19.67.024.1

5.4 A2.3 c2.7 c6.9 P6.8 P0.6 b0.3 b-14.6 b

2. Food grains prod. (million tones) 176.4 168.4 203.6 209.8 195.9 P 209.2 P

3. Electricity generated (million Kwh) 264.3 287.0 448.5 480.7 499.6 383.2 c

4. Average exchange rate( Rs. /US$) 17.94 24.65 42.07 4.33 45.68 47.49 d

5. Growth rate of money supply (M3) 15.1 19.3 19.4 14.6 16.7 11.2 e

6. Average rate of inflation (per cent)In terms of WPIIn terms of CPI

12.113.6

13.613.9

5.913.1

3.33.4

7.13.7

4.4 f 4.2 g

7. As per cent of GDP at current market prices:Gross domestic savingsGross domestic investmentCentral Government expenditureCentral Government receiptsGross fiscal deficit of Central Govt.

Exports fob (BOP)Imports cif (BOP)Trade balance

Net invisiblesCurrent account balance

Total capital flowsTotal foreign investment net (BOP)Foreign direct investment (FDI) netPortfolio investment

23.126.317.315.36.6

5.88.8-3.0-0.1-3.1

2.70.030.03

Negl.

22.022.616.215.24.7

6.97.9-1.00.7-0.3

1.70.050.05

Negl.

21.722.714.714.75.1

8.311.5-3.22.2-1.0

1.90.60.60.02

23.224.315.415.45.4

8.412.4-4.03.0-1.1

2.41.20.50.7

23.424.015.3PU15.3PU5.5PU

9.813.0-3.12.6-0.5

1.81.00.40.6

16.4 BE†

16.4 BE†

5.1 BE†

8. Parameters for external debt:External debt/GDP ratio (percent)

Debt service ratio (percent)Debt/ exports ratioShort-term debt to total debt ratio (%)

28.7

35.345410.2

38.7

30.24678.3

23.6

18.02834.4

22.2

16.22624.0

22.3

17.12223.5

21.0 h

2.8 h

9. Foreign exch. reserves (US$ bn)Import cover of foreign exch.reserves (in no. of months of imports)

5.82.5

9.25.3

32.58.2

38.08.2

42.38.6

49.5 *9.6

A: Advanced estimate, P: Provisional Q: Quick estimate

PU: Provisional and un audited (as reported by Controller General of Accounts, Department of Expenditure).RE: Revised estimate BE: Budget estimate Negl.: Negligible

b. During April- December 2001 (DGCI&S data).c. During April-December 2001.d. Average for April- January 2001-02.e. Annual growth rate as on January 11, 2002.f. Average based (April to January 19, 2002.g. April-December, 2001 (Average based).h. At the end of September 2001.*: At the end of January 2002.

†: Ratios to GDP at current market prices (base: 1993-94) of National Accounts Statistics released by the CentralStatistical Organization.

Source: Economic Survey, Ministry of Finance, Government of India, various

issues.



24

Table 2: Key Indicators (1991/92 – 1994/95)

1991-1992

1992-1993P

1993-1994P

1994-1995P

1991-1992

1992-1993P

1993-1994P

1994-1995P

Absolute Values Pe r C e n t C hange Ov er Pre v i ous Ye ar

1 2 3 4 5 6 7 8 9

Gross national

product ( Rs.thousand crore)At current pricesAt 1980-81 prices

542.0209.8

615.8218.7

695.3Q228.7Q 240.9E

15.20.6

13.64.2

12.9Q4.6Q 5.4 E

Gross domestic product (Rs.thousand crore)At current pricesAt 1980-81 prices

552.0214.2

627.6223.4

707.1Q233.0Q 245.3E

15.50.9

13.74.3

12.7Q4.3Q 5.3E

Agricultural production (1)

145.5 151.5 154.8 158.2A -2.0 4.1 2.2 2.2A

Food grain production(million tonnes)

168.4 179.5 182.1 185.0 -4.5 6.6 1.4 1.6A

Industrial production (2)

213.9 218.9 227.8 232.8(3) 0.6 2.3 4.1 8.0(3)

Electricitygenerated (BillionKWH)

287.0 301.1 323.5 257.9(8) 8.6 4.9 7.5 8.4(8)

Wholesale priceindex (4)

217.8 233.1 258.3 284.3(5) 13.6 7.0 10.8 11.5(5)

Consumer priceindex for industrial workers(6)

229.0 243.0 267.0 289.0(7) 13.9 6.1 9.9 9.5 (7)

Money supply(M3) (12)(Rs. thousandcrore)

317.0 366.8 433.6 498.4(10) 19.4 15.7 18.2 18.6 (11)

Imports at current prices (US $million)

19411 21882 23213 22708(8) -19.4 12.7 6.1 23.6 (8)

Exports at current prices (US $million)

17865 18537 22174 20871(8) -1.5 3.8 19.6 17.3 (8)

Foreign currencyassets (US $million)

5631 6434 15068 19651(9) 151.8 14.3 134.2 30.4 (9)

Exchange rate(Rs/US $ )a,b

24.65 28.96 31.37 31.38 (8) 27.2 14.9 7.7 0.1(8)

Note: Gross national product and Gross domestic product figures are at factor cost. One crore = 10 million.A- Anticipated; P-Provisional, Q- Quick estimates; E-Advance estimatesa Per cent change indicates the rate of depreciation of the Rupee. b Composite rate from March 1992 to February 1993.1. Index of agricultural production (principal crops) with base triennium ending

1981-82 = 1002. Index of industrial production 1980-81=1003. Average index for April-October, 1994.4. Index with base 1981-82=100. Percentage relate to point-to-point changes in

the index over the year.5. As on February 18,1995 for 1994-95 and for the last week of March for the earlier

years.6. Index with base 1982=100. Percentage relate to point-to-point changes in the

index over the year.7. As in December, 1994 and in March for the earlier years.8. April-January, 1994-95.9. As on February 13, 1995 for 1994-95 and the end of March for the previous years.10. As on January 20, 1995.11. April 1, 1994-January 20, 1995.12. Percentages relate to point-to-point changes over the year.



25

Table 2 contd: Key Indicators (1998/99 – 2001/02)

1998-1999

1999-2000

2000-2001

2001-2002

1998-1999

1999-2000

2000-2001

2001-2002

Absolute Values P er C en t C hange Ove r Pr ev i ous Ye ar

Gross national product

(Rs. thousand crore)At current pricesAt 1993-94 prices

1,583.11,070.5

1,740.2 P1,136.9 P

1,878.4 Q1,181.5 Q

2,060.6 A1,245.5 A

15.06.4

9.9 P6.2 P

7.9 Q3.9 Q

9.7 A5.4 A

Gross domestic product(Rs. thousand crore)At current pricesAt 1993-94 prices

1,598.11,082.5

1,755.6 P1,148.5 P

1,895.8 Q1,193.9 Q

2,080.3 A1,258.8 A

15.06.5

9.9 P6.1 P

8.0 Q4.0 Q

9.7 A5.4 A

Agriculture and alliedsectors (Rs. crore)(at 1993-94 prices) 2,86,094 2,89,842 2,89,194 3,05,643 6.2 1.3 -0.2 5.7

Index of agricultural production (1) 177.9 176.2 P 164.6 P 175.9 P 7.6 -0.9 P -6.6 P 6.9 P

Food grain production

(million tonnes) 203.6 209.8 195.9 P 209.2 P 5.9 3.0 -6.6 P 6.8 PIndex of industrial

production (2) 145.2 154.9 162.7 163.3** 4.1 6.7 5.0 2.3**

Electricity generated(Billion Kwh) 448.5 480.7 499.6 383..2** 6.6 7.2 3.9 2.8**

Wholesale price index (3) 141.7 150.9 159.2 160.7 * 5.3 6.5 4.9 1.3 *

Consumer price index for industrial workers (4) 414 434 445 469 @ 8.9 4.8 2.5 5.2 @

Money supply (M3) (5)(Rs. thousand crore) 981.0 1,124.2 1,311.6 1,458.4 ( 6 ) 19.4 14.6 16.7 11.2 ( 6 )

Imports at current prices(US $ million) 42,389 49,671 50,536 38,362 ** 2.2 17.2 1.7 0.3 **

Exports at current prices

(US $ million) 33,218 36,822 44,560 32,572 ** -5.1 10.8 21.0 0.6 **Foreign currency assets(7) (US $ million) 29,522 35,058 39,554 46,561 (8) 13.7 18.8 12.8 17.7 ( 8)

Exchange rate (Rs/US $)(9)

42.07 43.33 45.68 47.49 (10) -11.7 -2.9 -5.1 -3.8 (10)

Note: Gross national product and Gross domestic product figures are at factor cost (New Series; base= 1993-94). One crore = 10 million.Q- Quick estimates; A- Advance; P- Provisional;*: As on 19.01.2002 (provisional). @ : December, 2001. **: April- December, 2001.

1. Index of agricultural production (of 46 crops, including plantations) with base triennium ending1981-82 = 100 (revised).

2. Index of industrial production ; (base 1993-94=100).3. Index (with base 1993-94=100) at the end of fiscal year.4. Index (with base 1982=100) at the end of fiscal year.5. Outstanding at the end of fiscal year.6. As on January 11, 2002.7. Outstanding at the end of fiscal year.8. At the end of January, 2002.

9. Percent change indicates the rate of appreciation/ depreciation (-) of the Rupee vis-á- vis the US Dollar.10. Average for April – January, 2001-2002.

Source: Economic Survey, Ministry of Finance, Government of India, various issues.



26

Table 3: Tax Revenue and Expenditures of the Central Government

1990-91Actuals

1996-97Actuals

1997-98Actuals

1998-99Actuals

1999-2000Actuals

2000-01*(Prov.)

2001-02#(BE)

(As per cent of GDP)

1.Fiscal deficit2..Revenue deficit

3.Primary deficit

4.Gross tax revenue(a) Direct taxes

of which:(i) Income tax(ii) Corporation tax

(b) Indirect taxesof which:

(i) Union excise tax(ii) Customs

5.Total expenditureof which:(i) Interest payments(ii) Major subsides(iii) Defense(iv) Other non-plan expenditure(v) Budget support for plan

6.63.3

2.8

10.1 1.9

0.90.97.9

4.33.6

17.3

3.81.72.74.15.0

4.12.4

-0.2

9.42.8

1.31.46.5

3.33.1

13.9

4.31.02.22.53.9

4.83.1

0.5

9.1 3.2

1.11.35.9

3.22.6

14.2

4.31.22.32.53.9

5.13.8

0.7

8.32.7

1.21.45.5

3.12.3

14.7

4.51.22.32.93.8

5.43.5

0.7

8.93.0

1.31.65.8

3.22.5

15.4

4.71.22.43.23.9

5.53.9

0.8

9.03.3

1.51.75.7

3.32.3

15.3

4.71.32.43.04.0

5.13.4

0.2

9.93.7

1.81.96.1

3.62.4

16.4

4.91.22.73.24.4

* Provisional and un audited as reported by Controller General of Accounts, Department of Expenditure, Ministry of Finance.# The ratios to GDP at current market prices for 2001-2002 are based on CSO’ s Advance Estimates.

Note : 1. Ratios to GDP at current market prices (Base = 1993-94) of National Accounts Statistics released by the CentralStatistical Organization.

2. Figures are exclusive of the transfer of State’s share of net small savings collections.




27

Table 4: Sources of Tax Revenue of the Central Government

1990-91 1995-96 1997-98 1998-99 1999-2000 2000-01(PU)

2001-02BE)

Tax Revenue (Rupees crore)

Direct (a)PITCIT

Indirect (b)CustomsExcise

Gross Tax Revenue #

1102453715335

451582064424514

57576

335631559216487

768063575740187

11224

482741709720016

897414019347962

139220

466002024024529

958714066853246

143797

579592564730692

124494841961902

171760

681943167435685

1185594762368350

188365

852754060044200

1401425482281720

226649

Tax Revenue as a percentage of Gross Tax Revenue

Direct (a)PITCIT


19.19.39.3

78.435.942.6

30.214.014.8

69.132.136.1

34.712.314.4

64.528.934.5

32.414.117.1

66.728.337.0

33.714.917.9

65.528.236.0

36.216.818.9

62.925.336.3

37.617.919.5

61.824.236.1

Tax Revenue as a percentage of Gross Domestic Product*

Direct (a)PITCIT


Total #

1.90.90.9

7.93.64.3

10.1

2.81.31.4

6.53.03.4

9.4

3.21.11.3

5.92.63.2

9.1

2.71.21.4

5.52.33.1

8.3

3.01.31.6

5.82.53.2

8.9

3.31.51.7

5.72.33.3

9.0

3.71.81.9

6.12.43.6

9.9

One crore = 10 million.

# Includes taxes referred in (a) & (b) and taxes of Union Territories and “other” taxes. Tax revenue figures for 2001-2002 are budgetestimates, and for 1999-2000 and earlier years these are actuals.PU Based on Provisional un audited figures as per Controller General of Accounts.Refers to gross domestic product at current market prices. The ratios to GDP for 2001-02 are based on CSO’ s Advance Estimates

Note: (a) also includes taxes pertaining to expenditure, interest, wealth, gift, estate duty and VDIS for 1997-98 & 1998-99; (b) alsoincludes service tax;




28

Table 5: Savings and Investment

1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000(P)

2000-01Q)

(As percent of GDP at current market prices)

Gross domestic savings PublicPrivate

HouseholdFinancialPhysicalPrivate Corporate

Gross domestic investment*PublicPrivate

Gross domestic investment*GFCFChange in stocks

Savings-investment gap@PublicPrivate

24.81.723.219.711.97.83.526.08.714.726.021.91.4-1.2-7.08.5

25.12.023.118.28.99.34.926.97.718.926.924.42.2-1.7-5.64.2

23.21.721.517.010.46.74.524.57.014.724.522.8-1.0-1.3-5.46.8

23.11.321.817.69.68.14.224.66.616.024.621.70.9-1.5-5.35.8

21.7-1.022.718.910.58.43.722.76.614.822.721.5-0.1-1.0-7.67.9

23.2-0.924.120.310.89.63.724.37.116.124.321.61.7-1.1-8.07.9

23.4-1.725.120.911.09.94.224.07.115.824.021.91.0-0.6-8.79.2

Note: (i) Gross domestic investment denotes gross domestic capital formation (GDCF).

(ii) Figures may not add up due to rounding off.*: Adjusted to errors and omissions;@: Refers to the difference between the rates of savings and investment.

GFCF:Gross fixed capital formation.P: Provisional estimates Q: Quick estimates;

Source: Central Statistical Organization, New Delhi

Real Gross Domestic Capital Formation

1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000(P)

2000-01Q)

(As percent of GDP at market prices, 1993-94 prices)

GDCF* PublicPrivate

Pvt. Corporate sector Household sector

GFCFPublicPrivate

Change in stocksPublicPrivate

26.48.715.0

7.18.0

22.38.813.5

1.4-0.11.5

27.37.619.3

9.99.4

24.77.617.1

2.2-0.02.2

25.16.815.5

8.76.9

23.46.716.7

-1.00.2-1.2

25.96.517.3

9.08.3

22.96.216.6

0.90.30.7

24.86.616.7

7.69.1

.23.46.417.0

-0.10.1-0.3

26.77.118.5

7.810.6

23.86.317.5

1.80.81.0

26.37.118.0

7.011.0

23.96.717.2

1.10.30.8

Growth rate in percent

GDCF* Public

Private

GFCFPublicPrivate

22.913.9

24.0

11.818.08.1

11.1-6.5

38.5

19.3-6.536.1

-1.0-3.1

-13.7

1.5-5.94.8

7.7-0.8

16.4

2.1-2.84.1

1.37.3

2.6

8.79.48.4

15.716.2

18.1

8.64.910.0

2.03.0

1.1

4.710.92.4

Note: GDCF: Gross domestic capital formation; GDCF: Gross fixed capital formation;Figures may not add up due to rounding off.

*: Adjusted to errors and omissions; P: Provisional estimates; Q: Quick estimates;Source: Central Statistical Organization, New Delhi.



29

Table 6: Balance of Payments: Summary#(In US $ million)

1990-91

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

(April-September)2000-01 2001-

1. Exports2. Imports

Of which: POL

3. Trade balance

4. Invisibles (net) Non-factor servicesInvestment incomePvt. TransfersOfficial transfers

5. Current Account Balance

6. External assistance (net)7. Commercial borrowing (net)@8. IMF (net)9. NR deposits (net)10.Rupee debt service11.Foreigh investment (net)

Of which;(i) FDI (net)(ii) FIIs(iii) Euro equities & others12. Other flows (net) +

13. Capital account total (net)

14. Reserve use (-increase)

18,47727,915

6,028

-9,438

-242980-3,7522,069461

-9,680

2,2102,2481,2141,536-1,193103

97062,284

8,402

1,278

26,85535,904

5,928

-9,049

5,680602-3,4318,093416

-3,369

1,5261,030-1,143172-9834,807

1,2281,5032,0762,604

8,013

-4,644

32,31143,670

7,526

-11,359

5,449-197-3,2058,506345

-5,910

8831,275-1,7151,103-9524,615

1,9542,009652-2,235

2,974

2,936

34,13348,948

10,036

-14,815

10,196726-3,30712,367410

-4,619

1,1092,848-9753,350-7275,963

2,6511,9261,386-1,131

10,437

-5,818

35,68051,187

8,164

-15,507

10,0071,319-352111,830379

-5,500

9073,999-6181,125-7675,353

3,525979849-606

9,393

3,893

34,29847,544

6,399

-13,246

9,2082,165-3,54410,280307

-4,038

8204,362-393960-8022,312

2,380-390322608

7,867

-3,829

37,54255,383

12,611

-17,841

13,1434,064-3,55912,256382

-4,698

901313-2601,540-7115,117

2,0932,1358893,940

10,840

-6142

44,89459,264

15,650

-14,370

11,7912,478-382112,798336

-2,579

4274,011-262,317-6174,588

1,8281,847913-2,291

8,409

-5,830

21,74230,176

8,306

-8,434

5,569845-2,0676,669122

-2,865

-377-602-261,209-4612,272

1,082460730-610

1405

1,460

21,5527,81

7,628

-6,254

5,316524-12545,935111

-938

227-70301,107-3892,608

1,39869451633

2,883

-1,945

# Actuals.@ Figures include receipts on account of India Development Bonds in 1991-92, Resurgent India Bonds in 1998-99 and India Millennium

Deposits in 2000-01 and related repayments, if any, in the subsequent years.+ Include, among others, delayed export receipts and errors & omissions.

Source: Reserve Bank of India, Mumbai.



30

Table 7: Selected Indicators for the External Sector

(In US $ million) 1990-91

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

1.Growth of Exports- BOP (%)2. Growth of Imports – BOP (%)

(a) of which, POL (%)(b) Non-oil, non-gold-customs (%)

3. Exports/Imports-BOP (%)4.Import cover of FER (No. of months)5.External assistance (net) /TC (%)6. ECB (net)/TC(%)7. NR deposits /TC(%)8. Short-term debt/ FER (%)9. Debt service payments as % of

current receipts

9.014.460.0n.a.

66.22.526.326.818.3146.535.3

18.434.33.027.2

74.88.419.012.92.116.926.2

20.321.627.028.6

74.06.029.742.937.123.224.3

5.612.133.4-0.6

69.76.510.627.332.125.522.5

4.54.6-18.77.3

69.76.99.742.612.017.219.1

-3.9-7.1-21.62.5

72.18.210.455.412.213.218.0

9.516.597.14.6

67.88.28.32.914.210.316.2

19.67.024.1-6.7

75.88.65.147.727.68.217.1

[email protected]@[email protected]*

84.9@

As percent of GDP at Market Prices

10.Exports11. Imports12.Trade balance13. Invisibles balance14. Current account balance15.External Debt16.Debt Service Payments

5.88.8-3.0-0.1-3.128.72.8

8.311.1-2.81.8-1.030.83.4

9.112.3-3.21.6-1.727.03.4

8.912.7-3.82.7-1.224.53.2

8.712.5-3.82.4-1.424.32.7

8.311.5-3.22.2-1.023.62.6

8.412.4-4.03.0-1.122.22.5

9.813.0-3.12.6-0.522.32.9

@ Based on DGCI&S trade data for April-December 2001. *Based on DGCI&S trade data for April-October 2001.

Notes:(i) TC: Total capital flows (net).(ii) ECB: External Commercial Borrowing.(iii) FER: Foreign Exchange Reserves, including gold and SDR s.(iv) GDP mp: Gross domestic product at current market prices.(v) As total capital flows are netted after taking into account some capital outflows, the ratios against item no.5, 6 and 7 may,

in some years, add up to more than 100 per cent.(vi) Rupee equivalents of BOP components are used to arrive at GDP ratios. All other percentages shown in the upper panel

of the table are based on US dollar values.




31

Table 8: Foreign Investment Flows by Different Categories(US $ million)

1990-91

1991-92

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01*

Apr-Nov.*2001-01 2001- 0

A. Direct investmenta. RBI automatic route

b. SIA/FIPB routec. NRI s (40%&100%)

d. Acquisition of shares**B. Portfolio investmenta. F II #

b. G DR s / ADR s @c. Offshore funds & others

97---

-6--6

129-6663

-4--4

3154222251

-24412403

58689280217

-356716651520382

1314171701442

-382415032082239

21441691249715

112748200968356

28211351922639

12533121926136620

35572022754241

3601828979645204

2462179182162

400-61-39027059

2155171141084

49030262135768123

2339454145667

3622760184783182

146823591549

269103726769674

2365538131033

484131579947739

Total (A+B) 103 133 559 4153 5138 4892 6133 5385 2401 5181 5099 2505 3680

* Provisional** Relates to acquisition of shares of Indian companies by non- residents under section 5 of FEMA 1999. Data on such acquisitions have been

included as part of FDI since January 1996.# Represents fresh inflow of funds by Foreign Institutional Investors (FII).@ Represents the amounts raised by Indian Corporates through Global Depository Receipts (GDR s) and American Depository Receipts (ADR s).




32

Table 9: INDIA - National Competitiveness Balance Sheet

Notable Competitive Advantages Notable Competitive Disadvantages

Criteria Rank Criteria Ran

Growth Competitiveness Growth Competitiveness

3.01

3.023.093.06

4.094.084.124.114.07

3.04

6.016.04

6.126.02

2.03

2.302.012.262.282.29

InnovationTechnological Sophistication

Firm-Level InnovationUniversity/Industry Research CollaborationCompany Spending on Research and Development

Information and Communication TechnologyGovernment Success in ICT PromotionGovernment Prioritization of ICTLegal Framework for ICT DevelopmentLaws Relating to ICT useQuality of Competition in ISP Sector

Technology TransferFDI and Technology Transfer

Law and ContractsJudicial IndependenceFavoritism in Decisions of Government Officials

Organized CrimeProperty Rights

Macroeconomic EnvironmentAccess to CreditPotential for “Catch-up” GrowthInterest Rate SpreadRecession Expectations

National Savings RateInflationReal Exchange Rate

28

343842

1113252738

30

2636

4042

452735414142

3.19

4.134.174.154.164.14

7.02

2.24

InnovationTertiary Enrollment

Information and Communication Technology

Cellular TelephonesPersonal ComputersInternet HostsTelephone LinesInternet UsersCorruptionIrregular Payments in Government Procurement

Macroeconomic EnvironmentGovernment Surplus/Deficit

67

7373696967

70

72

Current Competitiveness Current Competitiveness

10.0710.04

10.11

3.119.113.05

Sophistication of Company Operations and StrategyExtent of marketingCapacity for Innovation

Breadth of International Markets

Quality of the Business EnvironmentAvailability of Scientist and EngineersLocal Availability of Information Technology ServicesQuality of Scientific Research Institutions

3236

37

41121

5.042.22

10.21

Quality of the Business EnvironmentRoad Infrastructure QualityExtent of Distortive Government Subsidies

Cooperation in Labor-Employer Relations

7368

64

Other Indicators Other Indicators

3.084.063.14

5.05

2.062.16

2.15

TechnologyTax Credits for Firm-Level Research and DevelopmentIT Training and EducationMinorities in the EconomyInfrastructureRailroad Infrastructure DevelopmentMacroeconomic EnvironmentExchange Rate PremiumLocal Equity Market Access

Access to Bond Markets

9921

21

421

24

8.05

2.102.312.11

10.19

Public InstitutionsPermits to Start a FirmMacroeconomic EnvironmentAccess to Foreign Capital MarketsAverage Tariff RateForeign Access to Local MarketsCompany PracticesHiring and Firing Practices

72

757472

73

Source: Global Competitiveness Report, 2001/02



Table 10: Poverty Ratio at the State Level

(Percent)

Rural Urban Combined

S.No. State 1973-74

1993-94

1999-2000

1973-74

1993-94

1999-2000

1973-74

1993-94

1999-2000

1.2.3.4.5.6.7.8.9.10.11.12.13.14.15.16.17.18.

19.20.21.22.23.24.25.26.27.28.29.30.31.32.

Andhra PradeshArunachal PradeshAssamBihar GoaGujaratHaryanaHimachal PradeshJammu & Kashmir KarnatakaKeralaMadhya PradeshMaharashtraManipur MeghalayaMizoram

NagalandOrissa

PunjabRajasthanSikkimTamil NaduTripuraUttar PradeshWest BengalA & N IslandChandigarhDadra & Nagar Hav.Daman & DiuDelhiLakshadweepPondicherry

All India

48.4152.6752.6762.9946.8546.3534.2327.4245.5155.1459.1962.6657.7152.6752.6752.6752.6767.28

28.2144.7652.6757.4352.6756.5373.1657.4327.9646.85

N.A.24.4459.1957.43

56.44

15.9245.0145.0158.215.3422.1828.0230.3430.3429.8825.7640.6437.9345.0145.0145.0145.0149.72

11.9526.4645.0132.4845.0142.2840.8032.4811.3551.955.341.9025.7632.48

37.27

11.0540.0440.0444.301.3513.178.277.943.9717.389.3837.0623.7240.0440.0440.0440.0448.01

6.3513.7440.0420.5540.0431.2231.8520.555.7517.571.350.409.3820.55

27.09

50.6136.9236.9252.9637.6952.5740.1813.1721.3252.5362.7457.6543.8736.9236.9236.9236.9255.62

27.9652.1336.9249.4036.9260.0934.6749.6027.9637.69

N.A.52.2362.7449.40

49.01

38.337.737.7334.5027.0327.8916.389.189.1840.1424.5548.3835.157.737.737.737.7341.64

11.3530.497.7339.777.7335.3922.4139.7711.3539.9327.0316.0324.5539.77

32.36

26.637.477.4732.917.5215.599.994.631.9825.2520.2738.4426.817.477.477.477.4742.83

5.7519.857.4722.117.4730.8914.8622.115.7513.527.529.4220.2722.11

23.62

48.8651.9351.2161.9144.2648.1535.3626.3940.8354.4759.7961.7853.2449.9650.2050.3250.8166.18

28.1546.1450.8654.9451.0057.0763.4355.5627.9646.55

N.A.49.6159.6853.82

54.88

22.1939.3540.8654.9614.9224.2125.0528.4425.1733.1625.4342.5236.8633.7837.9225.6637.9248.56

11.7727.4141.4335.0339.0140.8535.6634.4711.3550.8415.8014.6925.0437.40

35.97

15.7733.4736.0942.604.4014.078.747.633.4820.0412.7237.4325.0228.5433.8719.4732.6747.15

6.1615.2836.5521.1234.4431.1527.0220.995.7517.144.448.2315.6021.67

26.10

N.A. Not Available1. Poverty Ratio of Assam is used for Sikkim, Arunachal Pradesh, Meghalaya, Mizoram, Manipur, Nagaland and Tripura.2. Poverty Line of Maharashtra and expenditure distribution of Goa is used to estimate poverty ratio of Goa.3. Poverty Line of Himachal Pradesh and expenditure distribution of Jammu & Kashmir is used to estimate poverty ratio of

Jammu & Kashmir.4. Poverty Ratio of Tamil Nadu is used for Pondicherry and A & N Island5. Urban Poverty Ratio of Punjab used for both rural and urban poverty of Chandigarh6. Poverty Line of Maharashtra and expenditure of Dadra & Nagar Haveli is used to estimate poverty ratio of

Dadra & Nagar Haveli.7. Poverty Ratio of Goa is used for Daman & Diu.8. Poverty Ratio of Kerala is used for Lakshadweep.9. Urban Poverty Ratio of Rajasthan may be treated as tentative.10. Estimates on a 30-day recall basis for 1999-2000.

Source: Planning Commission, Government of India, New Delhi.

Documents

Indian Reform